Beware the Property-Owning Democracy
Is Labour’s talk of cutting the value of Aucklanders’ homes really a vote winner?
The Reserve Bank estimates the total value of New Zealand’s housing stock was $719 billion in December, up $11 billion compared with September. Those billions are quite well shared. In December, there were an estimated 1,761,000 private dwellings, suggesting an average value of $408,000. Of those, 1,134,300 — around two-thirds — were owner-occupied, including those held in a family trust. The other third were rental properties or those provided free to occupiers by individuals, private trusts, businesses and government agencies.
Those ratios have been quite stable since the Global Financial Crisis and recent New Zealand housing boom, with less than a 2 per cent shift towards renting since December 2007. Over 20 years, the change is only 7 per cent.
Contrary to popular belief, not everyone is mortgaged to the hilt. In December, there were 1,435,770 loans against residential mortgages, so most households owe something to the bank, as do landlords who are incentivised to be highly leveraged. But the total value of all our mortgage loans was only $190 billion. While that is high as a percentage of GDP, it is just 26 per cent of the total value of the housing stock, and up only $2 billion compared with September.
This means New Zealanders, including the government as the owner of 69,000 state houses, increased their equity in their homes and rental properties by $9 billion in the fourth quarter of 2013, to a record $529 billion. Heading into the election campaign, Labour says it wants to cut that equity. Its prospective Green, Mana and NZ First coalition partners agree.
Even National says it wants to collect more data, whatever that means. Are they really all sure that suddenly cutting the value of our homes is a vote winner?
The strategy of Labour, the Greens, Mana and NZ First is to restrict demand to force down prices overall. Labour says it will achieve this through a capital gains tax (CGT). The others say that banning current homeowners from selling to anyone other than New Zealand citizens and permanent residents would do the trick. Labour leader David Cunliffe also speaks darkly about “foreign speculators” but not of a ban.
Labour’s CGT proposal is a crock because it would exclude owner-occupied homes, which represent two-thirds of all residential properties in New Zealand, and only capture realised capital gains on the other third. That would make the owner-occupied home the only tax-free asset class in New Zealand. Even more than now, buying a better house would trump anything else as an investment, fuelling demand. With unrealised gains excluded, landlords would be incentivised to hold onto rental properties for longer to defer taxation, reducing supply.
Countries with the limited CGT that Labour proposes include Australia, Canada, the United States and the United Kingdom — all of which have experienced huge property inflation over the past 20 years. The evidence is conclusive that limited CGTs don’t work. To reduce house prices, a CGT would need to include all properties and all gains, which is why none will ever exist in a property-owning democracy.
The Green, Mana and NZ First proposals to ban foreign ownership would be more likely to create immediate downward pressure on prices — which is presumably why Labour isn’t so keen on them. Cunliffe’s political tactic is to imply to the one-third of households who are renting that there won’t be so many Asians the next time they’re thinking about going to an auction, while assuring the two-thirds of households who own their own homes that he has no intention of cutting their equity by restricting who they can sell to. Hopefully, Cunliffe is also alert to the economic risks of a sudden price drop. We’re told that a burst housing bubble could cause economic catastrophe by putting large numbers of homeowners into negative equity. How much greater the lunacy, then, to go ahead and deliberately pop it?
A better way forward is to focus on supply. Not since March 2009 has the number of residential dwellings increased by even one per cent a year. More startling, over the quarter century for which statistics are available, the housing stock has never increased by even two per cent a year. The reason house prices have gone up is that we haven’t built enough of them.
In 2012, David Shearer, Cunliffe’s predecessor as Labour leader, announced plans to work with the private sector to build 100,000 three-bedroom homes over a decade, priced around $300,000 to be within the reach of first-home buyers. There were doubts the policy was realistic but it at least looked at the right side of the equation. For National, John Key’s ministers have talked (and talked) about expanding urban limits, reforming the Resource Management Act and allowing greater intensification. There is now some evidence Nick Smith is getting on with it. It’s surely a better way to win votes (and make housing progressively more affordable) than attacking the immediate financial interests of 1,134,300 existing homeowners.
First published in Metro, May 2014. Photo: Getty Images.